DC Social Impact Bond Leadership Part of National Impact Investing Agenda

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Today, Social Finance US announced an innovative new impact investment initiative to address the challenge of high teen pregnancy rates in the District of Columbia. This initiative is one of more than twenty new commitments made public at yesterday’s White House Roundtable launch event for the U.S. National Advisory Board report, Private Capital, Public Good: How Smart Federal Policy Can Galvanize Impact Investing – and Why It’s Urgent. The study was produced by the U.S. National Advisory Board (NAB) on Impact Investing, which is co-chaired by Matt Bannick, Managing Partner of Omidyar Network, and Tracy Palandjian, Co-Founder and CEO of Social Finance US.

The NAB’s work grew out of an international effort at the G-7 level to explore the role that impact investing can play in accelerating economic growth and addressing some of society’s most important issues. The report helped to catalyze today’s commitment, which aims to direct more capital into impact investment that intentionally generates financial returns, as well as measurable social or environmental impact.

The report found that the impact investing field is currently at an inflection point, enlivened by new energy but yet to realize its full potential. The authors write, “For impact investing to reach massive scale – bringing private capital to bear on our greatest problems – it will require a more intentional and proactive partnership between government and the private sector.”

In particular, the study highlights strategies and reforms that the government can undertake to “unleash new capital, talent, and energy for social, economic, and environmental good.” These policies, many of which do not require any additional government spending, include: removing regulatory barriers and providing incentives to spur additional private impact investment; increasing the effectiveness of government programs; encouraging and supporting innovative impact-oriented organizations and impact investment opportunities; and improving data capture methods to facilitate accurate, transparent impact measurement.

As the report makes clear, the impact investing industry in the U.S. is not new, but recent years have featured an impressive acceleration of the pace, forward momentum, and innovative thinking in the sector. Social Impact Bonds (SIBs), like the District of Columbia initiative announced today, are one such innovation. In this project, Social Finance is partnering with the District of Columbia government and Wyman Center’s Teen Outreach Program to develop the first ever Social Impact Bond focusing on teen pregnancy prevention. A diverse collaborative of community organizations will deliver this proven, evidence-based program to reduce the incidence of teen pregnancy and improve educational outcomes for thousands of young people in the District. Social Finance and the District of Columbia will work with other stakeholders in the SIB partnership – the Wyman Center, local service providers, investors, and at-risk youth – to craft a rigorous, data-driven project based on Wyman’s nationally recognized, evidence-based intervention.

This program is a prime example of the exciting momentum in the impact investment sector. This SIB-funded initiative will help the government tackle a persistent social challenge by mobilizing investment capital to drive social progress and directing resources toward what works. As a multi-sector collaboration where investors benefit if and only if society does too, this project embodies a fundamental principle of impact investing.

Entry by Lara Metcalf, Managing Director, and Jane Hughes, Director of Knowledge Management

Thoughts on the Future of the SIB Market: A Summary of SSIR Webinar, “Social Impact Bonds: From Concept to Reality”

The Social Impact Bond (SIB) market has recently gained tremendous momentum. Today, there are four SIBs operating in the United States—channeling $50 million in capital to the social sector—and at least two dozen additional states and counties actively pursuing SIBs in their respective jurisdictions. SIBs are also garnering significant attention in the international arena. However, despite the progress achieved to date and media buzz generated by this innovative financing mechanism—there is even a daily global online SIB newsletter—SIBs have yet to achieve proof of concept.

On June 4, the Stanford Social Innovation Review hosted a webinar titled “Social Impact Bonds: From Concept to Reality” to identify what steps will likely need to be taken in order for SIBs to become a well-established, widely-accepted option for funding social interventions at scale. The session featured Social Finance CEO Tracy Palandjian and Sam Schaeffer, the CEO and Executive Director of the Center for Employment Opportunities (CEO).

Tracy delivered an overview regarding the state of the domestic SIB marketplace, focusing particularly on the nation’s first state-payor SIB, a transaction focusing on reducing recidivism and increasing employment in New York. However, she warned that this is not the only appropriate SIB model because at this still-nascent market stage, each deal is unique. “If you’ve seen one SIB,” she said, “you’ve only seen one SIB.”

Sam then shared CEO’s firsthand experience partnering with Social Finance on the New York State SIB. He also presented a framework in order to assist providers in assessing risks and opportunities across six major components of SIB transactions: capital source, investment stake, payment type, performance threshold, geography, and evaluation measures. He explained that in CEO’s first SIB transaction, his team believed it was important to: unlock new private capital without diverting a high proportion of existing philanthropy to the SIB; have zero skin in the game so CEO’s staff could concentrate on executing well; receive unrestricted, upfront funding so they could pay for service delivery as it happened; commit to a performance threshold within the confines of results CEO had previously produced; scale the program in jurisdictions where CEO had proven impact; and focus on measures for reducing recidivism for which CEO had demonstrated effectiveness.

Below are a few key takeaways from Tracy’s and Sam’s presentations regarding the transformative potential of SIBs and the future of this young market:

  • SIBs have the potential to fill a critical gap in the broader continuum of capital available to providers: Tracy explained that foundations in their capacity as grant-makers are in the business of “incubating great social innovations.” In an ideal world, government—as the largest funder of social services—would eventually “take out” philanthropy and “use its strong policy lever to allocate funds” for proven programs run by high performing organizations. The current state of affairs doesn’t reflect this “nirvana,” however. SIBs can fill this critical gap in the continuum by increasing the flow of “1) upfront, 2) multi-year, 3) highly flexible” capital to evidence-based providers in order to “accelerate that link to government uptake.”
  • SIBs represent a model for provider-friendly, performance-based contracting: Sam commented that if all government contracts could be structured like SIBs, “where the marginal costs are paid for, where the full overhead rate is paid for, we would be a much different organization vis-à-vis scaling. This is a great model for how I think performance-based contracting can work for providers.”
  • More experimentation must be done: Tracy stated that more deals need to be launched in order for the industry to fully take flight. “There’s got to be a great degree of experimentation still, because we want to continue to learn…. Standardizing too early could threaten the market if we’re not standardizing the right thing.”
  • SIBs promote much-needed sustained engagement by all parties: Tracy emphasized that “True societal change at scale requires [a] sustained effort over long periods of time.” SIBs are meant to address “gnarly, multidimensional, complex problems that can’t be solved overnight.” The hope is that SIBs “can promote sustained engagement by all parties—the provider, the clients on the ground, [and the] government.”

Both Sam and Tracy remarked on the collaborative nature of the industry. Sam conceded that entering into the transaction was a risk, but explained that the risk was mitigated by the SIB partnership structure. “Based on the commitment we saw from Social Finance, the commitment we saw from New York State—[CEO] knew this was a very good road to pursue.”

All stakeholder groups have contributed to the development of the market so far—“government in catalyzing the space, foundations in providing technical support, and providers in executing the work that improves people’s lives,” according to Tracy. This collaboration must continue. Tracy asserted that whether we can realize “the promise of [SIBs] being a multibillion dollar market to finance significant social change at scale” will be up to all players in the market and whether they can collectively continue doing the on-the-ground work that generates results in the coming years.

Entry by Maddie Sewani, Harvard Director’s Intern

First of Its Kind: Federal SIB Legislation Introduced

The pace of exploration regarding Social Impact Bonds (SIBs) has picked up at the federal level. President Obama’s FY2015 Budget included nearly $500 million in Pay-for-Success-related (PFS) funding, including a $300 million Treasury “Incentive Fund” and millions in Social Innovation Fund (SIF) grants. There are clear indications that the SIB conversation is moving forward at the federal level in a fashion already embraced in red and blue states – from Utah and Oklahoma to New York and Massachusetts.

On June 18th, Rep. Todd Young (R-IN, 9th) and Rep. John Delaney (D-MD, 6th) released the first federal-level PFS legislation, the “Social Impact Bond Act.” The draft legislation advances an approach to SIBs that provides an accountable, bipartisan basis on which to bring this still nascent market to the national level. Young and Delaney were joined by four Republicans (Reps. Griffin, Reed, Ross, and Schock) and three Democrats (Reps. Larson, Polis, and Kennedy) in introducing the legislation.

The goal of Rep. Young’s April legislative draft, one shared by the current legislation, was to “Improve the lives of families and individuals in need by funding social programs producing real results; to ensure effective use of federal funds; to scale effective social interventions already being implemented at various government levels; [and] to scale pay-for-performance within the social sector.” This bill represents a good first step toward making that goal a reality.

The $300 million legislation empowers the Treasury Secretary, with the assistance of a Federal Interagency Council, to fund feasibility studies, pay independent evaluators, and provide SIB outcome payments for contracts inked with state and local governments. The SIB Act identifies social policy areas that applications may address as projects with “measurable, clearly-defined outcome[s].” Smartly, policy areas listed are not limited to those appealing primarily to Republicans or Democrats. The bill would support projects focusing on a variety of outcomes – from increasing employment for the long-term unemployed to reducing dependence on federal means-tested benefits to reducing the incidence of low-birth-weight babies.

As a first step towards a SIB contract, states and localities can submit feasibility study applications, which at Treasury’s discretion, the federal government may fund at up to 50% of expected costs (although Treasury may spend no more than $10 million on feasibility studies in total). These extensive feasibility studies will essentially allow for extensive pre-vetting of SIB contract applications, owing to the mandated inclusion of outcome goals, intervention descriptions, target populations served, evidence demonstrating success, projected costs/savings, and other salient factors.

The Act is well-aligned with SIB goals to date. Particularly, both the feasibility and final SIB applications place a high priority on outcomes. And PFS contracts, at their core, allow government jurisdictions to determine an acceptable price to pay for social outcomes. Additionally, by purposing federal money – equal to any federal savings resulting from the contract within a ten-year horizon – towards additional outcome payments, the legislation may open up the market to projects with benefits that accrue across various agencies and levels of government. This is particularly exciting in the healthcare arena, where the Medicaid cost burden is shared by federal and state governments and the federal government picks up the Medicare tab.

The group sponsoring the SIB Act further demonstrates the inherently bipartisan appeal of a concept that promotes the accountable use of taxpayer dollars and an intense focus on measurable social policy outcomes. The legislation provides a strong foundation on which future federal involvement in the SIB market may rest.

Entry by Daniel Rubin, Associate

Social Impact Bonds: Healthy Dialogue on a Young Sector (from The Nonprofit Quarterly)

This article was originally published in The Nonprofit Quarterly and may be found online here: https://www.nonprofitquarterly.org/policysocial-context/24198-social-impact-bonds-healthy-dialogue-on-a-young-sector.html

 

Those of us with Google Alerts tuned to Social Impact Bonds, or SIBs, have found our in-boxes busier than ever in recent weeks. Toward the end of April, the UK government announced that the world’s first SIB, at Peterborough prison, would wind down early because the government would be financing the program itself starting in 2015. Barely a week later, there were Senate hearings on SIBs, which we found to be both balanced and intelligent, so we were surprised to discover that Rick Cohen seemed to have a different impression.

Now seems like a good opportunity to reflect on questions and concerns regarding SIBs. We at Social Finance share some observers’ worry about the gap between the hype and the reality of SIBs. Senator Angus King’s question, voiced at the Senate hearings, “Why doesn’t the government try to get it right?”—instead of financing social programs with private capital—resonates with us as well. And we understand Senator Kelly Ayotte’s puzzlement when she wondered aloud why the Massachusetts SIB involved $12 million in private capital but $27 million of outcome payments.

We view this as part of a healthy dialogue on an innovative and new mechanism to re-imagine the role of capital markets in social services; we welcome and even share many of these questions and concerns. The Senate hearings were an important part of this dialogue, in which senators posed questions that deserve a more thorough response than the limited time frame and format of the hearings allowed.

Do SIBs save the government money?

Senator Ayotte’s question about the $12 million to $27 million gap is the most easily answered, but unfortunately the Senate hearings did not allow time for a full response. The Massachusetts project involves $12 million in private capital, plus $6 million in recoverable grants (philanthropic grants that will be recycled for other philanthropic purposes). The $27 million is the maximum outcomes payment possible under the contract; at this level, the state would realize around $18 million in net savings—after the outcome payments have been made.

Indeed, a hallmark of all SIBs, including the New York State Social Impact Partnership led by Social Finance US, is the understanding that performance-based outcomes payments from government never exceed the savings and benefits accruing to the public sector. In the New York State project, for example, should a 40 percent reduction in prison recidivism be achieved, the outcome payments would total $21.54 million while the public sector benefits total $37.34 million. These numbers should lay to rest the suggestion that SIBs do not deliver cost savings.

Two of the Senate witnesses, who worked on a SIB analysis for the state of Maryland that recommended against the use of SIBs, referenced their report in citing a lack of cost savings. However, we challenge some of this report’s key assumptions, including those around marginal costs, multiple streams of value, recidivism and victimization reduction, and target population. The report assumes, for example, that a SIB would be focused on offenders with the average recidivism rate. However, a SIB targeting higher risk individuals (like those in Massachusetts and New York) would yield a larger absolute reduction in recidivism and, thus, more savings.

Also, SIBs are about much more than short-term savings. As Senator Mark Warner observed at the hearings, SIBs are “designed to ensure that government only pays for what works.” This stands in stark contrast to the “base budgeting” norm, which is framed by the prior year’s funding level rather than outcomes. Referring to base budgeting, Senator Ayotte quoted Ronald Reagan’s remark that “There’s nothing closer to eternal life than a government program.” SIBs are designed to break this mold.

SIBs also support evidence-based spending patterns and incentivize public-private partnerships. The Peterborough SIB, for example, is ending early not because it hasn’t worked, but because it has. Partly thanks to the SIB-financed project, government has become convinced of the value of funding reentry services for all short-term ex-offenders like those being served at Peterborough, and is taking on the responsibility for funding nationwide programs in the future. As Professor Jeff Liebman noted at the Senate hearings, SIBs are “useful for breaking through…obstacles to reform.”

And perhaps most important, short- to medium-term cost savings are only one aspect of the social and economic value that SIBs can deliver. We can monetize the budgetary savings achieved when SIB-financed support services succeed in keeping an ex-prisoner out of prison and gainfully employed over a 3-5 year time frame. What is left out of that equation, though, is the broader social improvement that derives from lower crime and a more productive citizenry.

Do investors demand an exorbitant risk premium?

Senator King suggested that the only way SIBs would work was if the funders took on substantial risk—for which they would expect to be compensated by a substantial risk premium, i.e., high returns on their investment. In a similar vein, some articles about the Peterborough events have suggested that future investors will be deterred from participating in future SIBs because of the early winding-down of Peterborough.

In fact, these statements reflect a misunderstanding of the motives of SIB investors. SIBs do not and should not appeal to finance-first investors, who are primarily motivated by profit maximization. Rather, SIBs are designed for double bottom line or impact investors, who seek social value alongside financial value. As Bank of America Merrill Lynch Managing Director Liam O’Neil recently remarked of their participation in the NYS project, “We were increasingly being told by our clients that they wanted their investments to be reflective of their values.”

Thus, expected returns on the Massachusetts and New York State transactions are in the low-to-mid-single digit range, which does not reflect a substantial risk premium. And from the Peterborough investors’ point of view, if the SIB contributed to government policy reform that removed the need for SIB financing, that is definitely a win.

Do these complex programs make heavy demands on scarce government resources?

Senator Ayotte worried, quite rightly, about the complexity of SIBs and the resultant demand on scarce government resources to structure and manage the projects. One of the witnesses argued that smallish pilot programs like Peterborough do not generate “significant” cost savings.

They’re right.

But this is the very nature of pilot programs and new models; as Senator Warner pointed out, SIBs are “a tool to leverage innovation.” Senator Whitehouse underlined this by commenting that government doesn’t do the “prototyping function” very well. In fact, all of the witnesses agreed that SIBs facilitate the innovation process by bringing in private capital to shoulder the risks of innovation. If all goes well and the SIB proves the value of up-front investment in preventative social services, then these services will become policy and the SIB financing is no longer needed. As in the Peterborough case, this counts as a win.

Why doesn’t government do this itself?

We wish they would. If government fully funded effective, evidence-based social programs aimed at preventing the emergence of serious problems like homelessness and substance abuse, then SIBs wouldn’t exist – and the world would be a better place.

But the fact is that they don’t. The Nurse-Family Partnership, which provides home visiting services to low-income, first –time mothers, is one of the most effective service providers in the U.S. As columnist Nicholas Kristof wrote in the New York Times,

This organization sends nurses to visit poor, vulnerable women who are pregnant for the first time. The nurse warns against smoking and alcohol and drug abuse, and later encourages breast-feeding and good nutrition, while coaxing mothers to cuddle their children and read to them. This program continues until the child is 2.

At age 6, studies have found, these children are only one-third as likely to have behavioral or intellectual problems as others who weren’t enrolled. At age 15, the children are less than half as likely to have been arrested.

For all of its clear value, however, Nurse-Family Partnership only has the resources to serve four to five percent of its target population every year.

In the absence of adequate funding from government and philanthropy – in the imperfect world that we inhabit – there is a role for private capital to help fill this gap.

No more silver bullets

Finally, let’s agree to retire the “silver bullet” charge once and for all. Those of us with knowledge and experience in the SIB market have never and will never assert that SIBs are a silver bullet for all social problems; this is nothing more than a straw man that SIB opponents like to use. Let’s agree to free our future dialogue of empty claims, hype and hyperbole—for the benefit of all.

In this frame of mind, we welcome the probing questions that have arisen around the Senate hearings and Peterborough announcement, and we appreciate the opportunity to add our thoughts. SIBs embody a new approach to private-public partnerships, so the field is enriched each and every time a creative dialogue emerges.

 

Entry by Jane Hughes, Director of Knowledge Management at Social Finance US, and Alisa Helbitz, Director of Research and Communications at Social Finance UK.

Peterborough SIB developments underline its flexibility and innovation

As you probably know by now, the prison recidivism project at Peterborough that was developed by our colleagues at Social Finance UK – the world’s first SIB — is winding down. The UK government has introduced a wide-ranging policy initiative to reform the entire probation system; as a result, support services will be offered to all short-term ex-offenders like those served through the Peterborough project. This means that the third and final cohort of the SIB will have access to services funded directly by the government rather than the SIB.

We see this new development as an opportunity to pause and reflect on its meaning for the entire SIB sector. Our colleague Toby Eccles, who pioneered the SIB concept at Social Finance UK, wrote the following analysis; we can do no better than to reproduce his words:

To understand this a little better, it is worth going back to why we developed the SIB model and set up the Peterborough pilot in the first place.

  • Enable innovation: It was felt that government struggled to try out new models or areas of public service delivery for fear of failure and the perception that if they spent money on something that didn’t work they would be accused of wasting it.
  • Enable flexibility and focus on outcomes: Organisations were frustrated that they were being procured to provide a series of defined inputs and processes, and then held to account to deliver exactly and only that. This produced two problems: firstly, for those providing a more holistic service they were often more expensive than another organisation that bid simply to provide the limited brief that they were asked for; and secondly programmes provided little room for learning. Success was to deliver what was pre-agreed, regardless of what was discovered during delivery.
  • Bring rigour to prevention: Preventative work was commissioned but often only for short periods of time, or unsustainably. Preventative services were perceived as a good idea, but usually weren’t being measured effectively. So they were at risk on the low end of the budget cycle, when money was tight, as they hadn’t built the evidence of their effectiveness.
  • Better alignment: Foundations often had quite a negative view of government. They fund things in the belief that if successful government will take them on, only to find that too often that is not the case and they are left with a dependent organisation on their hands. The SIB was designed to give each of government and foundations or social investors clear roles in the structure, allowing them to work together.
  • Investment in social change: We felt that creating positive social change at scale needed more than grant money. We thought that creating a structure that enabled investment in positive social change could, if successful, create an engine for further change and improvement to society.

When first considering the SIB model we looked at a range of areas, including reducing reoffending. When analysing reoffending it quickly became apparent that the lack of support for short sentence offenders, the lack of attempt to move people onto a different path, was simply wrong. So we gained a new objective, to demonstrate that we, as a country, should be working with short sentence offenders, rather than simply watching them going round and round the system creating more and more damage to themselves and others.

So how is Peterborough doing against those objectives?

  • Enabling innovationSuccess, the model was implemented, when without the SIB structure the project would not have been put in place.
  • Enable flexibility and focus on outcomesSuccess, as can be read in the RAND report, there are numerous citations from stakeholders that the model has enabled indeed required the service to adapt to the needs of service users and improve over time.
  • Bring rigour to preventionSuccess, what other prevention pilot do we know of that has had detailed figures published while it was ongoing? Admittedly, actual results according to the payment metric aren’t out yet, but this level of rigour simply isn’t normally seen.
  • Better alignmentSuccess, investors in the pilot were keen, and investors in further SIBs have also been keener to fund the programme than they would have been had it been a traditional grant funded project with no connection to government.
  • Investment in social change: Still building… We need more SIBs before we can claim that we have created a new investment community, though Bank of America Merrill Lynch distributing Social Finance’s New York State SIB to their wealthy clients is a significant step in this direction.

And finally, most importantly, have we made a difference to short sentence offenders? YES!!! There is a new statutory obligation to work with short sentence offenders across the country. Whatever the merits or otherwise of the wider… agenda, this is a very significant change on which many have been campaigning for a long time. Obviously it wasn’t just the Peterborough SIB that caused this change, but it clearly played a significant role…[Note: Final data using the SIB’s outcome metrics are not yet available, but early data indicate that while reoffending among short-term prisoners rose 10% nationally in 2013, at Peterborough it fell by 11%.].

Peterborough was not designed to be a test case for a national payment-by-results programme, but to enable innovation, to demonstrate the value of flexibility and focusing on outcomes, to bring greater rigour, and most importantly to shine a light on the woeful situation this country has with short sentence offenders. Against these objectives it has been and remains an iconic success, and a cause for celebration.

Entry by Jane Hughes, Director of Knowledge Management

Social Finance CEO Tracy Palandjian Rings NYSE Closing Bell with Members of U.S. National Advisory Board to the Global Task Force on Social Impact Investing

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On April 21st, Social Finance CEO Tracy Palandjian and other members from the 27-person U.S. National Advisory Board (NAB) rang the closing bell at the New York Stock Exchange (please find the video here). The NAB is tasked with recommending policy changes to the Global Task Force on Social Impact Investment, which grew out of the June 2013 G8 gathering of world leaders.

Launched by UK Prime Minister David Cameron, the Social Impact Investment Task Force—chaired by Sir Ronald Cohen, co-founder of Social Finance UK, US, and Israel—was formed to create a policy framework to accelerate impact investing and raise awareness about the role of innovation and public/private collaboration in solving some of the most vexing challenges, both social and environmental, of our time.

Palandjian, who co-chairs the U.S. NAB with Omidyar Network’s Matt Bannick, noted that “Our society faces challenges that cannot be solved by government and philanthropy alone, spurring innovative approaches that harness the efficiency and discipline of markets. Impact investments deploy private capital for public good and are intentionally designed to deliver social or environmental benefits as well as financial return.” Social Finance has driven impact investing through the use of a particular financing mechanism, Pay-for-Success, also known as the Social Impact Bond.

The U.S. cannot afford to leave both capital and talent underutilized during a time of economic distress. Consequently, the NAB will issue a report this summer to offer policy recommendations aimed at advancing impact investing in the U.S.

Entry by Daniel Rubin, Associate

Reflections from the Aspen Institute Event on “Foundations for Social Impact Bonds”

According the Rockefeller Foundation’s Kippy Joseph, Social Impact Bonds (SIBs) are the “tip of the spear of innovative financing instruments that can be put to use for the benefit of society.” Foundations have been among the early pioneers in the SIB market, and they will continue to support its development.

On March 4th, the Aspen Institute in Washington, D.C. hosted a launch event for the latest Social Finance (SF) White Paper, “Foundations for Social Impact Bonds: How and Why Philanthropy is Catalyzing the Development of a New Market.” The event featured a diverse panel of active players in the pay-for-success (PFS) sphere, including: Tracy Palandjian and Jane Hughes (SF); Tamar Bauer (Nurse-Family Partnership); Surya Kolluri (Bank of America Merrill Lynch); Bill Pinakiewicz (Non-Profit Finance Fund); Eileen Neely (Living Cities); Dave Wilkinson (White House Office of Social Innovation); and moderator Kippy Joseph (The Rockefeller Foundation). This post will provide a brief overview of salient points made during the event.

According to SF CEO Tracy Palandjian, at roughly $50 million, the US SIB market has emerged as the world’s largest, and the pipeline is only growing more robust as deals are actively pursued in red, blue, and purple states. To that end, Palandjian wants to ensure that SIBs remain primarily a force for good, and she believes foundation support will be vital to this effort.

SF Director of Knowledge Management Jane Hughes presented findings from the White Paper, which was developed with the goal of aggregating early philanthropic learnings in the SIB space. While foundations have differing reasons for entering the PFS market (growing the social sector pie, driving public efficiency and accountability, underwriting innovation, etc.), their involvement has generally fallen into one of three buckets:

  1. Bringing together partners and fostering connections;
  2. Providing grants, supporting demonstration projects, and mitigating risk through credit enhancement; and
  3. Direct philanthropic investment in transactions.

Hughes noted that while the long-term vision for SIBs has yet to be established, foundations will have a major role in shaping the future of the sector. SIBs represent an excellent opportunity for “pursuing uncommon partnerships in pursuit of a common goal,” and foundations may work like adhesive agents to cement these connections. Below are a few takeaways from event panelists regarding how philanthropies can continue to play a crucial role in advancing the market.

Looking Beyond “First-Movers”: Nonprofit Finance Fund’s Bill Pinakiewicz noted the sector-wide shift away from outputs, such that “outcomes [will] become the gateway to all capital.” However, the social sector has, in his opinion, a “flaccid musculature” when it comes to churning out organizations that can effectively seek out both financial and social returns. In addition to continuing support for “ready to rock” or “high-octane” nonprofits, such as Nurse-Family Partnership, foundations must create and disseminate templates for success that will enhance investment readiness and “SIB-ability” for a much larger swath of organizations.

Investing Beyond the Transaction: If, as Rockefeller’s Joseph suggested, the SIB market grows to $500 million by end 2015, foundations may need to diversify their role in order to maintain a catalyzing impact. Living Cities’ Neely believes that predevelopment grants would be a significant innovation in this direction. Over time, the work that goes into building transactions should be figured into overall deal cost, akin to an environmental assessment undertaken before a building project. Recoverable grants or forgivable loans undertaken to cover these pre-transaction items will help to move the PFS market forward.

Inspiring Investor Confidence: Bank of America Merrill Lynch’s Surya Kolluri noted that in a poll of clients, over 50% sought to ensure that their investment portfolio reflected their values. This percentage had an inverse relationship with client age, meaning that number will grow over time. His experience with the New York State SIB suggests that the presence of large foundations, like Rockefeller – which have invested their reputations, research, and dollars in the PFS space – inspires investor confidence, nudging them to commit. Foundations will continue to play this important role in attracting private capital.

Funding Intermediaries: According to Living Cities’ Neely, until PFS becomes more ubiquitous, the technical assistance role played by intermediaries, such as Social Finance, will remain essential. Given the rapidly developing pace of the market and the nuanced nature of this type of expertise, the demand for intermediary assistance is on the rise. Foundations can help bridge this gap by continuing to fund intermediary technical assistance until governments are willing to adequately compensate intermediaries for this work.

According to Dave Wilkinson, a “core insight” of the White House Office of Social Innovation is that government is very good at funding innovation in some fields (defense, pharmaceuticals, energy, etc.), but not the social sector. By “de-risking” government innovation, SIBs will assist in fully unlocking the sector’s potential.  Yet, as the panel’s insights made plain, for SIBs to fulfill their great promise, foundations must continue to play their essential, versatile role.

Entry by Daniel Rubin, Associate